Hirtle Callaghan Goes Tactical in 2019

As volatility returns to the market, the OCIO says investors shouldn’t run from risk assets.

T. Brad Conger

Markets offered no safe havens as volatility returned in 2018, and investors should be prepared for more of the same this year, says T. Brad Conger, deputy chief investment officer at outsourced CIO Hirtle Callaghan. Instead of getting mired in worry, however, Conger says now is the ideal time for asset owners to evaluate their portfolios and consider allocations that are better positioned for the late cycle.

Hirtle Callaghan revised its risk signals outlook in response to changes in the market toward the end of last year, shifting its US equities weighting to neutral while maintaining a positive view of emerging market equities and alternative asset classes like private credit. These investments are more active in nature but Conger says they’re also likely to perform well even if the market cools.

According to Conger, while the probability of a recession in the US remains low, US companies are likely to come under earnings pressure from slowing growth, which could disappoint investors. Against this backdrop, Conger suggests refining long-only equities strategies so that they are more selective. Hirtle Callaghan works with investment managers to create long-only equities portfolios of best ideas that have a limited number of high-conviction holdings. The approach maintains the simplicity of long-only but with a bit of an edge over simply buying the index or a generalist mutual fund that offers index-like returns. Placing a few educated bets could help to preserve capital in an environment where the broad market may not be moving in a single direction all the time.

Conger is also increasingly upbeat about emerging markets. He says companies in developing economies are exhibiting strong external balances, positive current accounts, and a “valuation gap that is more attractive than it has been in the past.”

Risk Assets Aren’t All Bad

According to Conger, a cultural shift is underway at smaller endowments, foundations, pensions, and family offices that is driving changes in how these organizations manage their portfolios in response to the uptick in volatility. “There’s a growing recognition that the portfolio needs to be more responsive to market events that happen between quarterly meetings,” he explains. That recognition is increasing demand for risk assets. “Allocators understand that because they aren’t time constrained in their investment process, they can hold more illquid investments and realize the higher premiums that come with them,” Conger says.

Hirtle Callaghan is working with allocators to position portfolios so that they are able to take advantage of tactical opportunities that arise out of volatility and add unique exposures. “We had some clients do well with investments in European distressed debt last year and other parts of the private credit space,” Conger says. “When you’re running a small endowment of say $100 million, a single private credit opportunity can be very meaningful to the portfolio, creating a differentiated source of outperformance. Giant pension funds are going to have a hard time investing in the same way because the opportunities are too small. Those are the kinds of scenarios we’re working through with our clients now that the market is starting to shift.”